Academic journal article Journal of Economics and Finance

Top Performing Banks: The Benefits to Investors

Academic journal article Journal of Economics and Finance

Top Performing Banks: The Benefits to Investors

Article excerpt

Published online: 6 July 2011

© Springer Science+Business Media, LLC 2011

Abstract In this study, we examine whether superior accounting performance as reported in the annual ABA Banking Journal Top Performing Banks survey translates into higher investor returns. We observe that the announcement effect is more pronounced during the early years of the survey. For the entire survey period and for later sub-periods in which bank holding companies (BHCs) are ranked based on return on equity (ROE), we observe statistically-significant superior holding period returns against both the S&P 500 index and in some cases a matched sample. These results include raw and risk-adjusted returns as well as buy and hold abnormal returns (BHARs). We obtain similar results after controlling for the market return, size, book-to-market ratio, and momentum factors.

Keywords Banks . Bank Holding Companies . Shareholder Returns . Accounting Return Measures

JEL G11 . G21

(ProQuest: ... denotes formulae omitted.)

1 Introduction

Over most of the last two decades, bank financial performance has been remarkably robust. However, in early 2007 the industry hit a stumbling block with the subprime mortgage crisis. As a result, the banking sector, while improving, continues to face significant challenges. Lax lending standards, primarily in the real estate sector, lead to lower returns for many banks. Evidence of industry struggles includes the failure of Washington Mutual Inc., in late September 2008. The bank was sold to J.P. Morgan Chase. Washington Mutual had $307 billion in assets, making it by far the largest bank failure in U.S. history (Sidel, Enrich and Fitzpatrick, September 26, 2008). Washington Mutual, like many other banks, had significant exposure to subprime mortgage loans. In addition, PNC received $7.7 billion in federal funds in late 2008 and orders to use it to purchase struggling National City, which it did for $5.58 billion, a mere $2.23 a share. Perhaps even more remarkable are the September 2008 takeovers of mortgage giants Fannie Mae and Freddie Mac by the U.S. government and the failure of Lehman Brothers.

As a result of this extraordinary turn of events, the strength of the banking sector is of even greater concern to those who study and/or invest in bank stocks. The Basel Committee on Banking Supervision is in the process of implementing capital and liquidity reforms to improve the resiliency of banks. Investors targeting opportunities in the stocks of financial institutions must identify those banks and bank holding companies (BHCs) that are likely to earn superior returns despite industry challenges. Investors need a reliable source of information regarding the health and performance of financial institutions. A possible source of this information is the ABA Banking Journal's "Top Performing Banks" survey.

The ABA Banking Journal is published by the American Bankers Association.

Editors published the first of the annual rankings survey in 1993. The financial information in the survey is based on FDIC call report data. The 1994 survey states: "Our original intent in ranking the most profitable banks was to develop a list of banks whose earnings indicated consistently superior performance in traditional banking activities" (p. 36). As such, early surveys did not include BHCs. Beginning in 1999, the ABA opened the survey to include both banks and BHCs. This survey is important to investors because it draws attention to banks and BHCs that exhibit the strongest accounting performance in the industry.

In this study, we examine whether superior accounting performance as reported in the ABA Banking Journal rankings translates into higher investor returns. We investigate both announcement-related returns associated with the annual survey's release as well as survey-to-survey holding period returns, on a raw and riskadjusted basis.

2 Literature review

In the banking literature, there has been little examination of the question of whether strong accounting measures of financial performance translate to higher shareholder returns. …

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